Proposed guidance on the new tips deduction for tax years 2025 through 2028 has been released providing an expansion on definitions and needed clarifications, including a proposed list of potentially eligible occupations.
The deduction was part of the tax law commonly referred to as the One Big Beautiful Bill Act. It is worth up to $25,000 and phases out once modified adjusted gross income (MAGI) exceeds $150,000 for single filers or $300,000 for those filing jointly.
Key takeaways include:
- Clarifies that the maximum amount of qualified tips that can be deducted on a return per calendar year is $25,000 regardless of single or married filing joint filing status.
- Insight: The new overtime compensation deduction specifically gives a max deduction of $12,500 for filing single and $25,000 for married filing jointly. This means that a marriage penalty is confirmed for the tips deduction. Also remember that no deduction is available on married filing separate returns.
- Confirms that service charges, automatic gratuities, and other mandatory amounts automatically added to a customer's bill are not qualified tips for the deduction, unless the customer is expressly provided an option to disregard or modify it without consequence.
- Insight: Establishments could start allowing customers to adjust automatic large group tips on the receipt to accommodate this rule. A qualified tip must be voluntary under the statute’s definition and it appears that the adjustment made would have to include making the tip zero.
- Reiterates that cash tips includes more than just cash – it’s anything that is paid in a cash medium of exchange, including cash, check, credit card, debit card, gift card, tangible or intangible tokens readily exchangeable for a fixed cash amount (casino chips), and any other form of electronic settlement or mobile payment application that is denominated in cash. Deductible tips would not include those paid in the form of event tickets, meals, services, or digital assets.
- Provides that the specified service trade or business (SSTB) limitation applies to employees of an SSTB category, regardless of whether the business is eligible for the section 199A deduction. Meaning that if the employer is a corporation who falls into an SSTB category, its employees would also be ineligible for the tips deduction.
- Clarifies that SSTBs listed on the IRS tipped occupation list provided within the guidance are still disallowed a deduction due to being or being associated with an SSTB.
- Insight: The law required Treasury to provide a list of occupations that customarily received tips prior to 2025 as a baseline. They may need to add some clarification within the list with regards to SSTBs to avoid confusion.
- Provides that qualified tips do not include those for services which are a felony or misdemeanor under applicable law, or for prostitution and pornographic activity.
- Example includes an unlicensed/uncertified bartender – his/her tips are not qualified tips because serving alcohol without a license is a misdemeanor.
Transition relief guidance for 2025 employer and taxpayer reporting is forthcoming, per Treasury officials.
Additionally, draft forms were provided for new deductions that will appear on 2025 individual returns. 2025 draft Schedule 1-A HERE will house the qualified tips, qualified overtime, car loan interest, and enhanced senior deductions. They are combined and transferred to new Form 1040, line 13b, as a below the line deduction. Draft of Form 1040 for 2025 can be found HERE.
The new law’s deductions can be complicated to understand and implement, especially in the first year. Please reach out to your RubinBrown advisor with any questions.
Published: 09/23/2025
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